Page 2: The business cycle
The national economy experiences periods of 'boom' and sometimes periods of 'bust'. In periods of boom most people tend to be better off. Businesses have full order books for their products so that sales and profits are high. At the same time there are high levels of employment. School leavers and graduates find it easy to get work with good prospects.
However, history shows that the good times do not last for ever. This is when recession sets in a period of weakening demand for most goods and services. This can then turn into a slump when there is rapidly growing unemployment and sales and profits fall substantially.
The period of time a recession may last for is variable. Forecasters look for signs of 'green shoots'. These are signs that a recovery is taking place. The 'green shoots' include new companies setting up, development of new products and firms starting to take on more employees.
A recession occurs when for two quarters (a quarter is three months) in a row the value of all the goods sold in an economy falls. This occurred in the UK and other parts of Europe in the second half of 2008.
Economic activity is measured by Gross Domestic Product (GDP) . GDP is a measure of all of the goods and services sold in an economy in a particular period, for example, a quarter.
The line graph most visually shows the impact of recession at the end of 2008:
- quarter by quarter changes shown in blocks
- four quarters (1 year) changes shown in the line graph.
How does recession affect a company like the Davis Service Group?
- Some of the Group's activities are in sectors that are not affected significantly by recession, for example, healthcare. Governments retain this type of activity as a high priority for the population, even in times of recession. About 30% of the Davis business is in this service sector.
- Some of the Group's activities are in mature markets. It is inevitable that there will be some decline in demand in these markets because in a recession demand falls and customers of Davis reduce their requirements and spending levels.
However, at the same time Davis Service Group has been growing rapidly in new markets such as Poland, the Baltics, and the Czech Republic. These economies are emerging markets at a different stage of the business cycle. This means that because their economies are still developing and textile rental is a new service, the impact of recession is smaller. As Davis is developing a new market, it therefore sees its sales continuing to increase.